n the previous pieces, we spoke about gold being an investment option to consider.

But like every other investment, you must be aware of its tax implication. Here's the bombshell: gold attracts capital gains tax.

To understand the tax implications of gold, you will need to get a few terms clear first.

• How to buy gold bars
• Buy a gold bar, not a necklace!
• Why jewellery is a bad investment
• Should you buy gold?

i. Since gold is a capital asset

Capital asset? What's that? It could be anything the income tax department says it is: land, shares, bonds or gold bars.

Interestingly, from 1973-1974, jewellery, too, was included in the category of a capital asset.

So your gold bars and jewellery are capital assets.

ii. ...it will attract capital gains tax

Simply put, capital gain is the profit made on selling a capital asset. You buy something the income tax department says is a capital asset. You sell it and make a profit. The difference (selling price - buying price) amount is your capital gain.

Hopefully, you will end up making a profit. In case you don't (selling price is less than the buying price), not only do you have my sympathies, but also those of the tax man. He will refer to it as a capital loss, and you can mention when you file your returns. But let's not confuse ourselves with that right now.

• All you need to know about capital gains tax

iii. So what is the actual tax rate?

That depends on how long you hold it for before you sell it.

• If you buy gold (or jewellery), and sell within 36 months, it is a short term capital asset.
• If you buy gold (or jewellery), and sell after 36 months (three years), it becomes a long term capital asset.

What's the big deal? The tax rate.

• For a short term capital asset, you will pay short term capital gains tax.
• For a long term capital asset, you pay long term capital gains tax.

For the former, the capital gain is added to your total income. You will be taxed based on the tax bracket you fall under.

Long term capital gains tax gets a little more complicated. The tax on long term capital gain will be 20%. But the actual capital gain is not just selling price - buying price, as it is with short term capital gain. It is more complicated.

• How your tax is calculated

iv. How long-term capital gains is calculated

For your benefit, the income tax boys allow you to take inflation into account. So you save more money.

This is done by using the Cost Inflation Index. Starting with 1981-82, the Reserve Bank of India [Get Quote] notifies the CII every year and the income tax department uses this figure in its calculations.

Let's take an example of you buying and selling some gold bars.

You bought them in: 1985-86
You bought them for: Rs 50,000
You sold them in: 1995-96
You sold them for: Rs 1.5 lakh (Rs 150,000)

Since you sold it after three years, it will be a long term asset. Let's see how tax is calculated on it.

Cost inflation index
1995-96 index / 1985-86 index
281/133 = 2.11278

Indexed cost
Buying cost x CII
50,000 x 2.11278 = 1,05,639

Long term capital gain
Selling price - Indexed cost
1,50,000 - 1,05,639 = Rs 44,361

Your capital gain would not be just selling price minus buying price, which is a flat Rs 1,00,000 (1.5 lakh - 50,000). It would be less (Rs 44,361), since inflation has been taken into account.

On this amount (Rs 44,361), a 20% capital gain tax is levied.

The message? If you buy gold, be prepared to hold on for the long run.

Not only will the price appreciate substantially over time, you also save on tax when doing so.

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